Yukos Hunting Rosneft Assets From Venezuela to Vietnam

Yukos-related litigation won’t wrap up anytime soon, according to GML Ltd., formerly Group Menatep, the holding company set up by Mikhail Khodorkovsky and his partners before Khodorkovsky was arrested and sentenced to more than a decade in prison. Photographer: Bartek Sadowski/Bloomberg

July 31 (Bloomberg) -- Armed with a record $50 billion
ruling against Russia for confiscating Yukos Oil Co., the ex-owners are targeting assets of state-run OAO Rosneft and OAO
Gazprom in a legal race that may run from Venezuela to Vietnam.

The 600-page judgment by an arbitration panel in The Hague
this week found Rosneft, which acquired most of Yukos’s assets
after they were seized and sold off, and Gazprom to be
instrumental in the campaign. Backed by such a ruling, the
former Yukos shareholders stand a better chance of winning
court-ordered seizures of assets of Russia’s two largest
companies than of sovereign property, which is usually immune
from confiscation, said Gus Van Harten, an arbitration expert at
York University’s Osgoode Hall Law School in Canada.

“If I were them, I’d be looking at Rosneft, who are the
customers, where are they paying, where is the oil being
shipped?” Van Harten said by e-mail.

Rosneft went from being Russia’s No. 10 crude producer to
the world’s largest publicly traded oil company by output, aided
by its acquisition of Yukos assets. The company is headed by
Igor Sechin, a longtime ally of President Vladimir Putin who was
deputy head of the Kremlin administration during the legal
assault on Yukos.

Germany, Texas

Rosneft’s biggest European asset is Ruhr Oel, a 50-50
venture with BP Plc that unites four German refineries, said
Alexander Kornilov, an Alfa Bank energy analyst in Moscow. Other
Rosneft assets outside of Russia include a stake in an Italian
refinery and shale-oil ventures with Exxon Mobil Corp. in Texas
and Canada. It also has major projects in Venezuela, a gas field
and pipeline in Vietnam and exploration ventures in Brazil and
Algeria.

Gazprom, which supplies about a third of Europe’s gas, owns
stakes in pipelines in Poland and under the Black and Baltic
seas, as well as underground storage facilities in European
Union-members Austria, the U.K., Germany and Latvia. It also has
trading or marketing units in almost every EU state.

The tribunal in The Hague said Rosneft in particular had
implemented the policy of the Russian government in its takeover
of Yukos. The court accepted the plaintiffs’ argument that the
$27 billion in tax claims used to justify the dismantlement was
“for the sole benefit of the Russian state and state-owned
companies, Rosneft and Gazprom.”

Khodorkovsky, Sechin

The two companies can be targeted because they were
beneficiaries of expropriated Yukos assets, said Yas Banifatemi,
a lawyer for GML Ltd., formerly Group Menatep, the holding
company set up by Mikhail Khodorkovsky and his partners before
the businessman was arrested and sentenced to more than a decade
in prison.

Russia said it would appeal what it termed a “politically
biased” ruling in Dutch courts, where there are only limited
technical grounds to annul international arbitration decisions.

Enforcing the award will be easier in some countries than
in others. Venezuela, for example, is one of Russia’s staunchest
allies and its court system is controlled by the government,
according to Human Rights Watch, so a ruling against Rosneft is
unlikely. Sechin flew an entire chamber choir from Moscow to
western Venezuela this week to perform in Hugo Chavez’s hometown
on the late president’s birthday.

‘Corporate Veil’

“Common law jurisdictions like the U.K. and the U.S. are
generally more flexible in treating companies as alter egos of a
state or in piercing the corporate veil,” said Jan Schaefer, a
lawyer at King & Spalding in Frankfurt. “German courts are much
more reluctant to ignore the corporate veil.”

Yukos-related litigation won’t wrap up anytime soon,
according to GML. Tim Osborne, who’s leading the legal battle as
head of GML, said it may take “a long while” to exhaust all
legal options.

The Yukos affair “could easily go on for another 10
years,” said Dmitry Gololobov, former chief attorney for the
defunct oil company.

Khodorkovsky, who was freed by Putin in December, has said
he transferred all his Yukos shares to Leonid Nevzlin before the
company was dismantled, so he isn’t entitled to any money
generated as a result of court action.

The European Court of Human Rights today ordered Russia to
pay all former Yukos shareholders 1.87 billion euros ($2.5
billion) in compensation for the dismantling of the company, in
a separate ruling that Russia will have to adhere to if it can’t
overturn it on appeal.

U.S. Victory

Nevzlin said in an interview published by Forbes Russia
after the ruling in The Hague that GML would accept less than
$50 billion if Russia agrees to drop the charges against himself
and other former Yukos employees. Nevzlin, who fled to Israel a
decade ago, declined to comment beyond what he told Forbes.

Khodorkovsky, once worth more than $15 billion, said
Rosneft and Gazprom will now have their hands full with major
legal battles to thwart confiscation of their assets.

“I think that Igor Ivanovich Sechin will now have more
problems that he expected,” Khodorkovsky said in an interview
with RBC Daily, the Moscow newspaper controlled by billionaire
Brooklyn Nets owner Mikhail Prokhorov.

Yukos has had legal success outside of Russia before. A
Dutch remnant of Yukos received $425 million from Rosneft in
2010 to cover loans given to a Russian affiliate before Rosneft
acquired it. And last year a U.S. court ordered a former Yukos
subsidiary now owned by Rosneft to pay $186 million to a
Luxembourg unit of Yukos. Those funds and another $1.7 billion
from the sale of other assets are held by two Dutch trusts that
Rosneft is seeking control over.

‘Huge Opportunity’

“The Hague ruling opens a huge opportunity for Yukos to
claim Rosneft and Gazprom assets in foreign courts,” Vladimir
Milov, a deputy energy minister in 2002, during Putin’s first
term as president, said by phone. “If the courts accept the
argument that Rosneft and Gazprom are instruments of the state,
then some of their foreign assets may be at risk.”

Russia, the largest supplier of oil and gas to Europe, is
already facing mounting sanctions levied over the conflict in
Ukraine, including by the U.S. on Rosneft and Sechin personally.
Rosneft accounts for 56 percent of Russia’s crude exports via
pipeline monopoly OAO Transneft, while Gazprom, controls all the
country’s exports of the fuel to Europe.

Rosneft complied with the law in acquiring Yukos
subsidiaries and doesn’t expect the decision to “negatively
affect its commercial activity or assets,” the oil producer
said in a website statement.

‘State Apparatus’

Gazprom declined to comment on the ruling. A manager at a
Gazprom affiliate said the gas exporter is prepared for a
protracted era of Yukos litigation that will be very unpleasant
for both the company and the country. He asked not to be
identified because he’s not authorized to speak to the media.

Still, Gazprom and Rosneft are protected to some extent
because most courts will be reluctant to punish all shareholders
equally, not just the biggest, which in this case is the Russian
government, according to Kyle Davis, a partner at Goltsblat BLP,
the Russian practice of Berwin Leighton Paisner.

“It will be difficult, probably impossible, to seize
Rosneft and Gazprom assets to satisfy The Hague award,” Davis
said. “These are public companies with thousands of
shareholders other than the Russian state.”

The Russian state owns about 50 percent of Gazprom and
almost 70 percent of Rosneft, in which BP has 20 percent.

Fighters, Paintings

Georgios Petrochilos, a partner at Three Crowns, a law firm
specializing in international arbitration, said GML’s most
convincing argument is the tribunal’s conclusion that Rosneft
and Gazprom have acted as arms of the government.

“What you would need to show is that Rosneft is
effectively part of the state apparatus,” Petrochilos said by
phone from London. Potential targets for court-ordered seizures
include tankers carrying Rosneft crude out of Russia, according
to Petrochilos.

If that legal precedent is set, it “could radically reduce
Russia’s export markets for oil and fundamentally change the
country’s engagement with international markets,” Robert
Amsterdam, a former Yukos lawyer, said on his website.

Global Hunt

Russia has endured lengthy legal odysseys before by
refusing to pay damages in commercial disputes. Noga Import &
Export SA, a Geneva-based trading company, won a series of court
rulings in Europe to enforce payment for goods including baby
food and pesticides that it supplied to Russia in exchange for
oil in 1991 and 1992.

Over the course of a decade, Noga won the temporary seizure
of Russian assets including fighter jets at the Paris Air Show
and Pushkin State Museum artworks on loan in Switzerland over
what it claimed was $680 million of debt.

Unlike previous Yukos-related litigation, though, The Hague
decision gives GML the right to go to arbitration courts in
about 150 countries, including Venezuela and Vietnam, that are
party to the 1958 United Nations convention on foreign arbitral
awards to enforce the ruling.

“It will be a question of identifying assets around the
world, going to local courts and getting attachments,” GML’s
Osborne said in a Bloomberg Television interview. “I don’t
think that Rosneft can be 100 percent confident that all their
assets in the West will be secure.”